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A Russian company makes a retreat from the US steel business

Severstal’s pending departure from the US steel industry comes wrapped in a curious history, and the scenes of this saga say a lot about America’s steel industry and its economy over the last 10 years.

Russia’s Severstal bought into the US sheet market in 2004 with the purchase of the former Rouge Steel in Dearborn, Michigan. Part of the historic River Rouge Complex built by Henry Ford, the mill has been in operation since 1920 and provided steel for Ford’s Model A cars, and many more Fords to follow, which were built on the same site.

With this auspicious move into the heart of America’s industrial heritage, cries that “The Russians are coming!” were confirmed by several more acquisitions that eventually made Severstal the fourth largest steelmaker in the US, with annual production capacity of about 13 million short tons – all sheet steel.

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By 2007, acquisitions by Severstal and other foreign steelmakers transformed American steel into an industry that was roughly 50% foreign-owned. Globalization had come to arguably the most American of industries, and some saw the trend continuing, due at least in part to government restrictions on steel imports resulting from US mills’ unfair trade cases. These included an antidumping duty suspension agreement that put volume quotas and price floors on sheet imports from Russia.

Then came 2008. Early in the year the US steel market was booming, with prices for hot-rolled coil, its bellwether product, doubling to more than $1,000 a ton by July, perhaps the most dramatic rise in steel prices ever. Apparently caught up in the fervor, Severstal in August of that year paid $1.1 billion for Esmark assets that included the former Wheeling-Pittsburgh Steel, an aging 2.5 million tons/year sheet producer that one industry analyst called a “garbage truck.” Several steel service centers, downstream processing facilities and the remaining interest in a coke plant were also part of the deal.

By comparison, Severstal bought Rouge Steel for just $285 million four years earlier, and Rouge had nearly 4 million tons of annual capacity, mostly producing sheet for the auto industry, steel’s most coveted market.

Severstal made two other costly purchases in 2008, the former ArcelorMittal sheet mill at Sparrows Point, Maryland, ($810 million for 4 million tons/year of capacity) and WCI Steel in Ohio ($370 million for 1.1 million tons/year).

These three 2008 deals, for about $2.3 billion in total, were all finalized by early August, which was not only the all-time peak for sheet steel prices, but the eve of the Great Recession. Lehman Brothers collapsed in September and . . . you know the rest.

Hot-rolled coil prices dropped from about $1,100/ton to $400/ton by May 2009 as the US economy sputtered. After two more years of market malaise, Severstal sold the Sparrows Point, Wheeling-Pittsburgh and WCI Steel mills to RG Steel, a subsidiary of the Renco Group, for $1.2 billion. A little more than a year later RG Steel filed for Chapter 11 bankruptcy and the three steelworks, with some 7.6 million tons/year of steelmaking capacity, were shuttered and mostly demolished.

Hot-rolled coil prices have scratched their way back to around $680/ton currently, which is proving to be a relatively steady and profitable price. This may explain why Severstal is now preparing to sell the final two pieces of its erstwhile US dynasty for a total of $2.33 billion. Steel prices have recovered and the Great Recession is just about over, making the acquisition of Severstal’s Dearborn mill (3.6 million tons/year) and another sheet producer in Columbus, Mississippi, (3.4 million tons/year) considerably more attractive.

These mills are set to be sold to two competitors: Ohio-based AK Steel will buy Dearborn for $700 million and Indiana-based Steel Dynamics Inc. has negotiated a price of $1.63 billion for the modern and expanded Columbus mill.

The acquisitions are expected to close by year-end, pending antitrust approval and other contingencies, including the unusual requirement that the deals for both mills go through before the transactions for either can be completed.

A successful conclusion would put the majority of the American steel industry solidly back in domestic hands.

Meanwhile, Severstal recently joined another Russian steelmaker fighting US mills’ effort to have the 15-year-old duty suspension agreement on sheet steel revoked because it has proven to be ineffective, meaning Severstal is likely preparing to resume its role of supplying the US market from afar.